Report: 5th Consecutive Year of City Revenue Decreases

Cities are tapping rainy day funds, which have lost 40 percent of their value from the pre-recession days.

City governments are expected to see revenue declines for the fifth consecutive year – and the situation may not improve for several more, according to a new study by the National League of Cities.

As a result, most cities are reducing personnel and delaying infrastructure projects, among other cuts, as they continue to face uncertainty about the future of their finances.

“Cities have known they’ll need to deal with these issues for the last several years, and they’re still in the process of doing so,” said Michael Pagano, co-author of the report and dean of the College of Urban Planning and Public Affairs at the University of Illinois-Chicago, during a conference call with reporters. “I think what we don’t know is what the end will be.”

The report reflects the stark fiscal reality for local governments, which have seen declines in sales, income and property taxes. Fifty-seven percent of financial officers say were less able to meet their city’s fiscal needs in 2011 than they were in 2010, and those working in cities that rely on property taxes were particularly negative. “If the housing market, unemployment and consumer confidence continue to struggle, it’s difficult for them to predict where their revenue will come from,” says Christopher Hoene, NLC’s research director and co-author of the report.

Because of the way property is assessed and taxed, there's typically a delay of at least 18 months between the current market conditions and when they're reflected in a city's finances. That means property taxes could continue to be at lower levels for several more years. “We hope, usually coming out of a recession, that the worse would be over at this point,” Hoene says. “But given where economic conditions lie, that seems to be very unclear.”

The study was based on a survey of 272 financial officers from cities of various sizes. Some cities have already finished the 2011 fiscal year, while others won’t see it conclude until the end of the calendar year.

City finance officers are projecting their general fund revenue will decline by 2.3 percent compared to 2010 -- a year when they suffered their largest year-to-year reductions in the survey’s 26-year history. Expenditures are expected to be down 1.9 percent.

With tax revenue on the decline, cities are trying to re-capture funding by increasing various fees – a step more than 40 percent of those surveyed took. Yet only about 20 percent increased their property tax rates in 2011, which Hoene says is a typical number.

Elected officials are reluctant to increase taxes at a time when citizens are struggling financially, Hoene says, and in many places, state and local laws restrict local governments’ ability to increase those tax rates.

Many cities are also drawing down on their reserves. That's troublesome, since ratings agencies and others view those reserve funds as a key measure of a city's financial health. Cities’ reserves have decreased three years in a row and are down 40 percent from their pre-recession peak, according to NLC’s study.

City leaders, Pagano says, are “rethinking their fiscal architecture," and it may be time for them to start asking if it’s time to make major changes if they’ve entered a “new normal” as some suspect.

The authors say cities are expected to continue to make personnel cuts and draw down their reserves even further in coming years. Pagano warned that deferring infrastructure costs could be risky, since cities trying to achieve short-term saving by deferring maintenance may face bigger expenses down the road if they let infrastructure falls into dangerous disrepair.

Half the respondents to the survey also say they’re losing aid that comes from the state government. And while only about 4 to 5 percent of local funding comes directly from the federal government, that funding tends to cover crucial areas, like the Community Development Block Grants program and transportation infrastructure. As Washington pursues its goal of debt reduction, cuts to those areas could exacerbate cities’ struggles, Hoene says.